Imagine that you run a company with some of your highest-revenue products making significantly less money than they did in the past. What steps would you take? How about investing more in research and development?
The management teams of the big pharma companies don't have to exercise their imagination. They are living the hypothetical scenario described above. How are they responding to this challenge? Let's take a look.
Data and directions
Pharma companies are taking quite different approaches to investing in R&D, as the chart below shows.
Source: Company 10-K and other financial reports.
The split among these big 12 pharma companies is right down the middle. Half increased R&D expenditures in the second quarter of this year compared to last year while half cut R&D expenses.
How did revenue growth or loss impact companies' decisions related to R&D spending? The chart below shows that a direct correlation existed between revenue growth/loss in the most recent quarter and R&D spending increase/decrease for several companies. (Note: Roche data reflects the percent revenue change for the first half of the year rather than the most recent quarter.)
Sources: Yahoo! Finance, company 10-K reports and other financial reports.
Roche was the primary outlier on the positive end of the spectrum, increasing R&D significantly more than its revenue increase. Merck
On the negative side, Pfizer
Some companies took different paths, though. The chart below highlights companies that either increased R&D while revenue shrank or decreased R&D with revenue increasing year-on-year.
Sources: Yahoo! Finance, company 10-K reports and other financial reports.
AstraZeneca
Dilemmas and decisions
Some of the big pharma companies face a dilemma requiring tough decisions. They can cut R&D spending to keep the bottom line looking good in the wake of declining revenue. However, cutting R&D too much could jeopardize prospects for launching new moneymaking products.
Another alternative is to continue funding R&D even as revenue drops off. This approach, though, can lead to unhappy investors if earnings suffer too much before the investments pay off.
Pfizer appears to have taken the former approach. Astrazeneca could be a poster child for the latter road, going full steam ahead with R&D spending despite decreasing revenue.
Which is the right path? That remains to be seen.
However, how a company spends its money on R&D is more important than how much it spends. Investors should research the fundamentals and product pipelines of each company before buying the stock. That's the kind of R&D that pays off over the long run.
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